In early July, US President Trump (Donald Trump) signed the “Big Beautiful Bill,” which will bring tax implications to those who receive student loan forgiveness.
The 2021 American Rescue Plan Act stipulated that student loan forgiveness is tax-free at the federal level, effective until the end of 2025. However, the “Big Beautiful Bill” may exempt certain types of student loan forgiveness from taxes, but it does not extend the federal tax-free provision.
Experts point out that in theory, Congress may take action before the end of the year to extend tax-free benefits, but borrowers should not hold high hopes for this.
Higher education expert Mark Kantrowitz stated, “The Republican Party has never supported student loan forgiveness and is unlikely to agree to make it tax-free.”
If Congress does not take action, starting in 2026, student loans granted forgiveness through the Income-Driven Repayment (IDR) plan from the Department of Education will once again become subject to federal taxation. Under IDR, borrowers’ monthly payments are adjusted based on disposable income and any remaining balance is forgiven after 20 or 25 years of repayment.
Kantrowitz noted that the Internal Revenue Service usually counts forgiven debt as income for borrowers, so when the repayment period ends, the amount due on tax returns could be substantial.
Currently, IDR borrowers have an average loan balance of about $57,000. Kantrowitz estimates that for those in the 22% tax bracket, the forgiven loan could result in over $12,000 in taxes. Lower-income individuals in the 12% tax bracket may owe around $7,000 in taxes.
Additionally, borrowers who receive loan forgiveness may be required to pay state taxes. Experts suggest that many states align their tax policies with the federal government, so more states may start taxing student loan forgiveness next year.
Consumer advocacy groups have long criticized the government’s practice of taxing student loan forgiveness, pointing out that many IDR borrowers already struggle with debt repayment, and it is cruel to forgive student loans only to tax them again.
Persis Yu, Deputy Director and Legal Director of the Student Borrower Protection Center, expressed, “Forcing borrowers to continue to bear heavy debt burdens is truly cruel.”
According to the provisions of the “Big Beautiful Bill,” student loan forgiveness obtained through death or disability is permanently tax-free.
If an employer assists employees in repaying student loans, that assistance will also be tax-free. Currently, employers can provide up to $5,250 in tax-free assistance annually, with adjustments for inflation in the future.
Under the Public Service Loan Forgiveness (PSLF) program, loan forgiveness for public service at the federal level has always been tax-free and will continue to be tax-free, but some states may tax it. The program allows government and certain nonprofit organization employees to receive debt forgiveness after ten years of repayment.